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Pursuant to a congressional request, GAO evaluated the surety bond requirements for home health agencies (HHA) participating in Medicare, focusing on: (1) analyzing the key features of surety bonds that affect their costs and effect; (2) examining the Florida Medicaid program's experience with a surety bond requirements for HHAs and its relevance to the Medicare surety bond requirement; (3) reviewing the rationale for the surety bond requirements the Health Care Financing Administration (HCFA) selected, the cost and availability of bonds, the benefits for Medicare, and the implications of substituting a government note for a surety bond as set forth in a Department of the Treasury regulation; and (4) drawing implications from the implementation of the HHA surety bond requirement for implementing a similar surety bond provision for durable medical equipment (DME) suppliers, comprehensive outpatient rehabilitation facilities (CORF), and rehabilitation agencies.

GAO noted that: (1) a surety bond is a three-party agreement in which a company, known as a surety, agrees to compensate the bondholder if the bond purchaser fails to keep a specified promise; (2) the terms of the bond determine the bond's cost and the amount of scrutiny the purchaser faces from the surety company; (3) when the terms of bonds increase the risk of default, more firms have difficulty purchasing them; (4) the likelihood that a firm will be unable to repay a surety increases fees charged and collateral requirements or the surety's unwillingness to sell it a bond; (5) Florida Medicaid's experience offers few insights into the potential effect of Medicare's surety bonds because the state implemented its surety bond requirement selectively, for new and problem HHAs, in combination with several other program integrity measures; (6) after implementation, Florida officials reported that about one-quarter of its Medicaid-participating HHAs had left the program, however, this exodus was not caused primarily by the surety bond requirement; (7) HCFA requires a surety bond guaranteeing HHAs repayment of Medicare overpayments, and it has set the minimum level of the bond as the greater of $50,000 or 15 percent of an agency's Medicare revenues out of concern that about 60 percent of HHAs had overpayments in 1996, amounting to about 6 percent of Medicare's HHA spending, and that, in their opinion, overpayments would increase in the future; (8) yet, HCFA's experience shows that most overpayments are returned, so that the net unrecovered overpayments were less than 1 percent of Medicare's home health care expenditures in 1996; (9) HCFA's implementing regulation requiring a bond guaranteeing the return of overpayments made for any reason rather than only those attributable to acts of fraud or dishonesty increases the risk of default; (10) sureties' scrutiny, which focuses primarily on an agency's business practices and financial status, is probably useful for screening new HHAs; (11) a Treasury regulation that allows the substitution of a government note for any federally required surety bond may undermine the purpose of the bond because HHAs could avoid surety scrutiny; (12) the Balanced Budget Act also requires the DME suppliers, CORFS, and rehabilitation agencies obtain a surety bond valued at a minimum of $50,000; and (13) Medicare will benefit from greater scrutiny of these organizations and their stronger incentives to avoid overpayments.

Matters for Congressional Consideration

Status: Closed - Not Implemented

Comments: Congress has not yet acted on this recommendation as of August 2005.

Matter: With respect to the surety bond requirements that GAO is recommending, Congress may wish to consider exempting from a surety bond requirement HHAs that have demonstrated fiscal responsibility--for example, those that have maintained a bond for a specified period of time and have returned any overpayments.

Status: Closed - Not Implemented

Comments: Congress has not yet acted on this recommendation as of August 2005.

Matter: With respect to the surety bond requirements that GAO is recommending, Congress may wish to consider eliminating the option for HHAs of substituting a Treasury note, U.S. bond, or other federal public debt obligation for a surety bond.

Recommendation for Executive Action

Status: Closed - Not Implemented

Comments: HCFA believes it needs statutory authorization to implement this recommendation. At one time, it had an instruction that one bond for both programs would be acceptable for smaller HHAs, but has since rethought that position, and believes additional statutory authority would be needed for it to be implemented.

Recommendation: To implement the Balance Budget Act's surety bond requirement for HHAs, Administrator, HCFA, should revise the present regulation so that all HHAs obtain one financial guarantee surety bond in the amount of $50,000 for the guaranteed return of overpayments for both Medicare and Medicaid.